Navigate the latest trends and emerging issues with new resources and expert guidance from Checkpoint Edge.
In this edition, we take a look at the recently enacted corporate alternative (book) minimum tax; new elections to convert credits to cash or tax payments; changes to the electric vehicle credit; recent legislation in Kansas, Kentucky, and Missouri; and state taxation of forgiven student loans.
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Corporate Alternative (Book) Minimum Tax
Who needs to know: Corporate taxpayers and their advisors
The Inflation Reduction Act of 2022 imposes a new 15% corporate alternative (book) minimum tax on the adjusted financial statement income of applicable corporations (those with 3-year average financial statement income of at least $1 billion).
In-house corporate tax departments and their tax advisors need to understand their book minimum tax exposure. While some taxpayers clearly fit the 3-year average $1 billion dollar financial statement income definition of an applicable corporation, other corporations may have planning opportunities to avoid the book minimum tax altogether.
Checkpoint Edge resources:
Advising Clients on the New Corporate Alternative Minimum Tax (non-subscription link)
Executive Summary: Inflation Reduction Act of 2022
FTC coverage begins at A-8900 Corporate alternative (book) minimum tax
Client Letter: 2150 Corporate Alternative Minimum Tax for Tax Years beginning on or after Jan 1.2023
PPC Tax Planning and Advisory Guide: Closely-Held C Corporations, Section 600 Introduction to the Corporate Alternative Minimum Tax (AMT)
Confidently advise clients on the new corporate AMT with a 7-day trial of Checkpoint Edge!
New Elections to Convert Certain Business Credits to Cash or Deemed Income Tax Payments
Who needs to know: Business taxpayers and tax professionals who advise businesses
The Inflation Reduction Act of 2022 introduced two new provisions that present new opportunities for business taxpayers:
- The Code Sec. 6418 election, which allows a taxpayer to transfer eleven business credits to an unrelated person for cash; and
- The direct-pay election under Code Sec. 6417, which allows businesses to convert three business credits to a deemed payment of income tax equal to the amount of the elected-for credit. Tax-exempt organizations may make this election for twelve credits. This has the effect of turning a “nonrefundable” credit into a “refundable” credit. If the amount of a taxpayer’s refundable credits exceeds its tax liability, it can receive the excess as a refund. Nonrefundable credits, as the name implies, are only applied against tax and may not be refunded.
An election similar to the direct-pay election applies to the Code Sec. 48D advanced manufacturing (“CHIPS”) credit.
- Tax professionals need to determine if their business clients are eligible for these elections, whether making the elections is appropriate for each client, and how to make the elections.
Find extensive commentary on these credits in Checkpoint’s Federal Tax Coordinator:
L-17980 Post-22 Election to Convert Certain Business Credits to Deemed Income Tax Payments
L-17990 Post-2022 Election to Transfer Certain Business Credits for Cash
Changes to the Electric Vehicle Credit – Checklist, Client Letter, Guidance
Who needs to know: Tax professionals who advise individuals or businesses; vehicle manufacturers and their advisors
The Inflation Reduction Act of 2022 changed the Code Sec. 30D credit for electric vehicles considerably. Major changes that electric vehicle buyers will have to deal with at the end of 2022 and beginning of 2023 include how the credit is calculated, the requirement that vehicles be assembled in North America, an increase in the minimum required battery capacity, and limitations based on the buyer’s modified adjusted gross income and the manufacturer’s suggested retail price of the electric vehicle. In limited circumstances, buyers can take advantage of a transition rule and apply the pre-Inflation Reduction Act Code Sec. 30D provisions.
Vehicle manufacturers are also adapting to new requirements that (i) components of a vehicle’s batteries be manufactured in North America, and (ii) critical minerals in the batteries be sourced in the U.S. or countries with which the U.S. has a free trade agreement.
- Tax professionals have an opportunity to advise electric vehicle buyers as they navigate the multiple effective dates and qualification requirements for the new credits. Vehicle manufacturers need to model the broader tax implications of any supply chain adjustments they decide to make in response to the credit requirements.
Checkpoint resources:
Client letter: 2164, Tax credit for buying a plug-in electric vehicle
Tax Action Memo: Changes to the Electric Vehicle Credit Start Now
Federal Tax Coordinator coverage begins at: L-18000 Post-2022 New Clean Vehicle Credit and L-18030 Pre-2023 Credit for New Qualified Plug-in Electric Drive Motor Vehicles
1040 Deskbook: Key Issue 15H: Electric Vehicles and Alternative Motor Vehicle Issues
New Legislation and Guidance from Kansas, Kentucky, and Missouri
Who needs to know: Retailers in Kansas; individuals in Kentucky and Missouri; and tax professionals advising these taxpayers
While most state legislatures have wrapped up their 2022 legislative season, 14 state legislatures remain in session or are in a special session. Several states enacted new tax legislation in recent weeks:
- Kentucky reduced the individual income tax rate to 4.5% beginning in 2023 and increased the standard deduction;
- Missouri reduced the top individual income tax rate to 4.95% and will impose no income tax on taxable incomes of $1000 or less beginning in 2023;
- Kansas issued detailed guidance on recently enacted legislation providing COVID-19 property tax assistance to retail storefronts that were operationally shut down or restricted by a state or local order in 2020 or 2021. The eligibility requirements are complex and businesses must apply for the relief before April 15, 2023.
Reduced tax rates in 2023 may provide year-end planning opportunities for taxpayers in those states and businesses will need assistance determining whether they are eligible for Kansas’ retail storefront COVID-19 relief.
Checkpoint resources:
Kentucky personal income tax rate reduced for 2023
Missouri personal income tax rate reduced for 2023 and possibly beyond
Kansas: Guidance on COVID-19 Retail Storefront Property Tax Relief Act
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State Taxation of Forgiven Student Loans
Who needs to know: Accounting firms and other tax professionals
On August 24, 2022, President Biden announced that the U.S. Department of Education will cancel up to $10,000 ($20,000 for Pell Grant recipients) in federal student loan debt for many borrowers, subject to income limitations. Although canceled debt is usually includable in an individual’s federal gross income, a provision in the American Rescue Plan Act of 2021 excludes such canceled debt income for discharges in 2021-2025. Whether a borrower is taxed at the state level on the discharged or partially discharged loan largely depends on if and how the borrower’s state income tax code conforms to the Internal Revenue Code.
- Keeping track of the various state income tax approaches for forgiven student loans can be a challenge for busy tax return preparers. Although most states will not tax the forgiven loans, for those states that do, failure to include the forgiven debt in income for state income tax purposes can result in interest and penalties.
Find Checkpoint’s analysis of the current rules in State Taxation of Forgiven Student Loans (non-subscription link).
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